There is only one lottery in town that almost always pays big rewards and has minimal downside risk. This explains why such enormous excitement surrounds initial public offerings.
While it is true that it is an unequal lottery in which the bigger players get a larger slice of the action, it remains the case that within the relatively small space available for retail investors, excitement is considerable.
This will be seen again this week with the launch of shares in the mainland-based concrete and building materials manufacturer BBMG. The issue has been massively oversubscribed, making it Hong Kong's second-largest IPO this year. And it won't be long before this launch is followed by a slew of other IPOs.
The cost of entry to this lottery is relatively modest: subscription fees are in the range of HK$50 and it only gets more expensive for investors who take on margin financing so that they can bid for large allocations. In a typical new share launch, only 10 per cent of the issue is allocated to retail investors, which explains why competition is far fiercer at this end of the bargain basement and why most private investors come away with no more than a couple of lots.
Although it is well known that those lucky enough to acquire allocations of shares in an IPO are likely to make a substantial profit by selling them on the first day of trading, it is less often appreciated that in Hong Kong, newly issued shares tend to outperform the market as a whole in the near term and handsome profits can be made by investors buying the shares after prices have settled down from their initial spurt in the first day of trading.
First-day gains can be impressive. Earlier this month, Amber Energy came to the market after its retail shareholders' allocation was oversubscribed 1,247 times; it thundered onto the bourse with a 63 per cent price rise on the first day of trading. Other new issues this year have been equally impressive, with first-day price increases ranging from 20 to 30 per cent.